SME Commercial Finance Trends in 2024

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SME Commercial Finance Trends in 2024: What SMEs need to know

Despite a tough economic climate, there are reasons for optimism about the UK’s SME funding landscape. This blog examines the critical role of brokers, alternative finance options, and digital transformation in helping businesses secure the capital they need.

SME Commercial Finance Trends in 2024

The new year brought news of a 25% jump in the number of UK companies in critical financial distress, as businesses grappled with higher interest rates, resilient inflation and weaker consumer confidence. 

Meanwhile, the European Central Bank and the Federal Reserve both reported in Q4 2023 that credit standards for loans tightened moderately, owing to banks’ higher risk perceptions and lower credit quality of loans. And the Bank of England’s survey of SMEs, published on 11th March, found that 58% of underinvesting businesses cited the cost of credit as a major barrier to investment. 

That’s the bad news. The good news? Credit conditions look set to improve in the near-term, with expectations of rate cuts in H2 2024 after two years of continual hikes. Indeed, in its latest credit conditions survey, the Bank of England reported that availability of commercial credit to small businesses in Q4 2023 had already increased, with availability expected to increase again in Q1.

Beyond improving credit conditions, this blog will explore three key trends expected to shape the SME funding landscape in the year ahead: the crucial role of brokers, the rise of alternative finance solutions, and accelerating digital transformation. 

Although lenders expect credit conditions and availability to improve in 2024, they also predict a rise in defaults among SMEs, as lingering effects of the pandemic and the war in Ukraine, such as supply chain disruptions and labour shortages, continue to be felt. 

Against this background, seeking expert help in securing loans at affordable rates is key. According to latest survey findings from the National Association of Commercial Finance Brokers (NACFB), 32% of small businesses securing funding through brokers in 2023 had previously faced capital refusals elsewhere (compared to 22% in 2022), highlighting the crucial role of organisations like Hilton Smythe in the SME financing ecosystem. 

Brokers can help turn a “no” into a “yes” by compiling a strong application package, presenting all the necessary documentation (including financial statements, business plans, and projections) in a clear and compelling way. They might also be able to advise clients on strategies to improve their creditworthiness, such as reducing debt or negotiating better payment terms. 

A skilled broker can also structure the loan proposal in a way that optimises the client’s chances of approval, e.g. by proposing different loan types, collateral options, or guarantors.

Against a background of changing base rates and loan rates, brokers can also advise businesses on how much a given loan will cost them over the whole borrowing term,  exploring whether they want to go for a fixed rate rather than a variable or hybrid rate – which is particularly important for young businesses without a positive cash flow. 

In total, commercial finance brokers facilitated £38bn in lending to UK SMEs in 2023. 

In the NACFB survey, a significant majority (over 52%) of surveyed brokers reported a decrease in lending appetite across all types of lenders. This has led nearly three-quarters (72%) of these brokers to anticipate a rise in businesses using alternative lenders in 2024.

Some industry experts, such as Time Finance’s CEO Ed Rimmer, are already reporting an increase in businesses building alternative finance into their long-term finance strategy. “Some key shifts lie in cashflow solutions, like refinancing, where we continue to see this as a tool used by businesses to maximise the value of their assets and unlock vital funds,” he told Leasing Life. 

Invoice finance and asset-based finance are also expected to continue their rise in the coming year: the latest data from UK Finance shows that the invoice finance and asset-based lending sector supported UK businesses with a combined turnover of £316bn in 2023 – an annual record – with the average value of advance per client sitting at £583,000, the second highest recorded. 

59% of SME lending now comes from outside of the big banks.

Brokers like Hilton Smythe are uniquely positioned to help businesses access these diversified financing solutions, with access to a wide panel of online lenders, invoice factoring and finance companies, asset-based lenders, and other speciality finance companies. 

By spearheading adoption of machine learning and advanced analytics, as well as Open Banking technology, the increasing dominance of FinTechs and neobanks in the lending landscape looks set to expedite credit decision-making. 

Through Open Banking, business owners can grant lenders read-only access to real-time financial data, while automated data collection, risk decisions and pricing accelerates approvals, ensuring quicker access to funding.

FinTechs using AI to offer streamlined lending services include Capify, which specialises in providing alternative financing options such as merchant cash advances and business loans to SMEs. Online invoice financing platform, Kriya, uses machine learning algorithms to assess SMEs’ the creditworthiness of invoices and advances funds to businesses against their unpaid invoices. 

The outlook for SME funding in 2024 is a mixed bag. While credit conditions are expected to improve, securing financing might still present challenges.  This is where partnering with a commercial finance broker like Hilton Smythe can make a real difference.

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